Don#39;t try to time the market, advises Siddharthaa Bhaiya of Aequitas

Market Outlook

Siddharthaa Bhaiya, Managing Director and Fund Manager of Aequitas, said their investment philosophy is guided by a multibagger approach that identifies long-term potential through extensive in-house research.

They invest in Indian listed equities in small and mid cap space and identify companies that are leaders by way of margin or sales in their respective sectors.

Siddharthaa Bhaiya added that they hold stocks through their entire wealth creation journey making average holding period approximately 4-5 years.

In an interview to Moneycontrol, he said they do see potential in the auto space. Here are edoited excerpts from that interview:

What is your investment philosophy and what is your suggestion to the new-age investors?

Don’t try to time the market: As famously said by Peter Lynch: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” Nobody can predict what is going to happen with markets with so many factors at play. The important thing is to develop a habit of investing regularly.

Seek what you Understand: There are thousands of different ways to earn money in the market, the important thing is to stick to your strategy.

Overcome Emotional Biases: Do not get emotionally invested in the market and make sure to take decisions based on rational thinking.

The Power of Compounding: A lot of new-age investors I see, venture into the markets seeking thrill and instant gratification. However, these are the ones, who leave the stock markets at the first correction and are never to be seen again. It is important to stick with your picks if the fundamentals are correct and let the power of compounding play itself out.

Discipline: As with every aspect of life, discipline will take you a long way when it comes to investing as well.

Our investment philosophy is simple and is guided by a multibagger approach that identifies long-term potential through extensive in-house research. We invest in Indian listed equities in small and mid cap space.

Our approach is to identify companies which are leaders by way of margin or sales in their respective sectors which are currently ignored with negligible institutional coverage trading at cheap valuations providing enough “Margin of Safety” and have potential catalyst in place leading to revenue and P/E (price-to-earnings) re-rating. We hold our companies through their entire wealth creation journey making our average holding period approximately 4-5 years.

Considering the global environment, is it a good time to go overboard on stock ideas after recent sharp corrections? What are the themes to focus on, given the recent correction?

This again brings us back to the question of trying to time the markets. Just because in the last couple of months, markets have corrected and stocks are available at 20-30 percent less than their all-time highs, it does not mean the valuation is cheap. There is an interesting saying that 90 percent stock correction is the stock falling by 80 percent and then correcting another 50 percent.

So rather than just going overboard because of recent sharp corrections, one must focus on the fundamentals and invest in companies that are undervalued.

We do believe that there are pockets within the markets where investors can make money but these are sectors which are significantly under-represented in the benchmark:

>> Short Cycle Capex – Indian corporates are expanding capacities.
>> Commodities – Globally we are under invested in commodities, which is now coming back to bite us. Given the significantly long gestation periods we believe this cycle will be a 5-7 years cycle before it peaks out.
>> B2B Manufacturing – China factor and moving away from “Just in time” to Just in case” inventory will go a long way in creating a robust Indian Manufacturing. Even a 3 percent dip in Chinese market share in these sectors can potentially see Indian companies growing by 25-30 percent.

>> Auto & Pharma – We believe that these 2 sectors have the potential for future growth. It remains to be seen how things pan out in these sectors.

In line with the above thesis we have positioned our portfolio.

The market performance in 2022 so far has not been good as we are down 10 percent. Do you expect the fall to continue in second half also?

There have been multiple factors at play that have resulted in the current downward trends in the markets, most significantly the looming inflation that was accelerated by the Russia Ukraine War Crisis. All central banks across the world are taking measures to curb inflation by squeezing out the liquidity from the economy.

This inflation is not due to supply constraints but is demand driven, and I still do not see the demand going down, which means we can expect further measures by the central banks to curb demand. So, to answer your question whether, the second half will be better than the first half, is anyone’s guess.

Despite recent corrections, auto is amongst the least impacted sectors. Do you think the worst is over for the sector, and are you gung-ho on the sector?

The Indian Auto sector: After 2019 peak, due to multiple factors the demand was hit, the most important being financing becoming difficult. And in auto sector a lot of sales depends on easy financing. Majorly hit were commercial vehicles (CVs) and tractors. Post 2019, the industry continued facing problems, initially due to impact of Covid and later due to shortage of semiconductiors when the industry could not meet the demand requirements.

Currently we are witnessing increase in inflation which has led to interest rates rising leading to increase in EMIs for auto loans. However, due to the tough times that the industry has faced in the past few years there is pent up demand that we feel will still drive growth.

We do see potential and are currently monitoring the sector.

In the 2 wheeler segment we see 2 trends: 1) Skyrocketing prices due to inflation, and 2) Disruption with emergence of multiple electric vehicle (EV) players.

Most of the risk factors are known to the markets now. Do you think any known factor that is yet to be factored in by the market?

There are always unknowns in the markets which no one has a clue about.

These unknowns once they play out are the risks and “Risks” are always known in hindsight. To give you a few examples from what has happened in the past 2 years.

No one knew COVID was going to cause global lockdowns and to have such a severe impact on stock prices in March 2020.

In 2021 no one was looking at inflation as a risk as it was “Transient”.

In 2022 No one thought we will have the Russia-Ukraine war and yet here we are 4 months into it.

Today the excessive money printing, the supply chain disruptions, the resurgent demand and resultant inflation are risks that have all been priced in with the benefit of hindsight.

There will always be risk of the unknowns in the market and no one can predict it. That is in part the charm and the lure of the markets.

The risks are outliers – something that investors have to live with.

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